Flex Election NOT Withheld due to Error by PR

[Guest sniffles]

Under our Section 125 Plan we offer a Flexible Benefit Medical Reimbursement Plan. An employee elects to have 38.00 withheld for the 2008 Plan Year. After employee quits on 5/20/08, we find out that Payroll did not withhold ANY money for the flex account and former employee never told Employer about the mistake.

Can we deduct the amount that WOULD have been withheld from his payroll check from the Flex Reimbursement Check?

Come March 31st and former EE turns in $988 flex claims for reimbursement. What is our Legal Obligation?

Do we pay because payroll didn't catch the mistake? Do we NOT pay because the Employee did not catch the mistake on his pay stub?

HELP!!

[QDROphile]

Pay the $38 of benefits and call it good.

[jpod]

Sniffles: I assume you meant $38 per pay period, which times 26 equals $988.

If I were the employer I would deduct the amount which he should have contributed from the $988 and give him the difference tax free. I realize that he is losing the tax benefit on the deducted amount. Let's say that the deducted amount for less than five months of work is $450, and the lost tax benefit is $150. What is the likelihood that he is going to sue the employer over $150? Probably zero, unless he's a nut. What is the likelihood that the IRS will audit the employer, discover this and blow up the plan? Probably zero.

[GBurns]

If you are going to even consider that suggestion, I suggest that you have a good lawyer ready for the employee's subsequent actons.

Failure to honor the employee's salary reduction agreement should be a plan failure.

That the employee did not notify of the error, is a separate issue. PR also did not notify either the ER, the EE nor the Plan Administrator. Allocate blame proportionately if you want to see who was "more" negligent.

There is no paycheck from which to now make the deduction and the only remaining source is the reimbursement check.

The Uniform Coverage provision states that the full amount up to the annual election must be available. It is not clear from the OP how much that is. I doubt that it really was $38 for the year but rather per paycheck.

It could be possible to deduct the net after tax equivalent of the missed salary reductions from the amount payable out of the amount submitted as claims.

****************

Edit: My response is directed at QDROphile's suggestion.

[Guest sniffles]

Well after talking to about 10 people including the department of insurance, the dol, and the irs over the last 45 minutes - we HAVE to pay the full $988. Doesn't matter that there was an error in deducting the amounts from his pay check.

Only thing that matters is the signed Election Form where he states how much he wants deducted. So the company has a loss of $988 for that Plan Year.

There really should be some kind of regulations or error corrections that are allowed, but evidently not.

[Guest sniffles]

The lady from the IRS couldn't help but laugh. She thinks the former employee knew what they were doing.

[QDROphile]

GBurns:

Of course the answer is different if the election was not $38 for the year as stated in the original post. But wait, maybe it is not really that different. Let's see, if the actual election added to $988 for the year, and we substitute to come up with "pay the $988 of benefits and call it good" what would you say?

I would say you really go out of your way to find something to criticize instead of giving thoughtful consideration to the posts.

While the employer might have some recourse to overpayment of the employee, I don't think it is worth pursuing and your suggestion of withholding from the benefit payment is definitely a bad one.

[Bill Presson]

I'm a bit confused about a couple of things, so please bear with me.

1. Participant elects to have $38 per pay period withheld for 2008.

2. Participant quits 5/20/08 so he has probably completed 11 of the 26 pay periods and had $418 withheld.

3. I think we are all in agreement that if he turns in $988 of claims on March 31, 2008, the company/plan would have to pay the full amount.

4. The OP says that he comes in and submits the claim on March 31 and I am assuming it is 2009.

Questions:

1. With this scenario now laid out (assuming I'm accurate), does everyone still agree that he is eligible to receive the full $988?

2. What is the "run out" period? I'm guessing 3 months/90 days, but just want to make sure he didn't miss a deadline.

[jpod]

sniffles: When you call the IRS and DOL with questions like this, the answer is predictable and you get what you pay for. I can't speak for your State's Dep. of Insurance, but I'm not sure how it plays a role here anyway.

[jpod]

QDRO: You said: "While the employer might have some recourse to overpayment of the employee, I don't think it is worth pursuing and your suggestion of withholding from the benefit payment is definitely a bad one."

I'm surprised you feel that way. Where is the real (as opposed to theoretical) risk here in the employer offsetting? There is nothing in the regulations that says you can't do this; they don't address the issue.

[J Simmons]

I'm a bit confused about a couple of things, so please bear with me.

1. Participant elects to have $38 per pay period withheld for 2008.

2. Participant quits 5/20/08 so he has probably completed 11 of the 26 pay periods and had $418 withheld.

3. I think we are all in agreement that if he turns in $988 of claims on March 31, 2008, the company/plan would have to pay the full amount.

4. The OP says that he comes in and submits the claim on March 31 and I am assuming it is 2009.

Questions:

1. With this scenario now laid out (assuming I'm accurate), does everyone still agree that he is eligible to receive the full $988?

2. What is the "run out" period? I'm guessing 3 months/90 days, but just want to make sure he didn't miss a deadline.

That run out likely began 1/1/2009 even though his employment ended 5/20/08, at least most of the documents I've seen don't specify the run out to begin on a mid-year termination at that time. March 31 was the 90th day, if that is what the plan specifies. The plan documents do need to be checked to make sure Bill's concerns are vetted.

[GBurns]

QDROphile

It was certainly thoughtful consideration of the issue by you to suggest " Pay the $38 of benefits .... ".

The $38 (or whatever) was never deducted, so it cannot be refunded.

The $38 (or whatever) is not part of the claims submitted for reimbursement.

You totally disregard the submitted claims (assuming timeliness as raised by Bill).

You also disregard the missed employee contributions.

So I wonder what was your thoughfully considered rationale that is above and beyond any criticism or comment.

[QDROphile]

Gburns:

You are talking out of both sides of your mouth as well as other orifices.

A literal reading of the post was the the participant elected $38. I suggested that the benefits be paid to the extent of the election.

If the election was $38 per month, a fair reading of the suggestion is that benefits be paid to the extent of $38 per month (the election).

Who said anything about refund?

$38 (or $38 per month) certainly IS within a claim for benefits of $988. All of that information is in the original post, and it was not disregarded -- all the numbers are consistent, no matter which interpretation of $38 you choose.

I dare you to come out and say that benefits are not payable, whatever else you may believe about the ultimate effect of offset or consequences on qualification of the plan.

I am waiting for you next twisted take on any of the facts as presented or any of the comments offered. Dig yourself in some more.

I did not miss the issue of failure of actual salary reduction. It is my view that the dollar amounts involved do not warrant the trouble of trying to recoup the excess compensation, which was implicit in my first post for lack of any comment on action beyond payment of the claim. The point was explicit in my second post. You can disagree on the ancillary question about offset or related actions, but that is not what you say you are quarreling about.

jpod, unlike GBurns, asks a legitimate question in a legitimate way based on implied legitimate disagreement. Disagreement is OK. My response to jpod's legitimate post is that I am very uncomfortable with an employer's messing with an ERISA benefit, even if the benefit is not directly covered by the anti-assignment provisions (you would absolutely never try an offset under a retirement plan). The plan is still subject to exclusive benefit requirements. Therefore, I would not try to get recovery out of the payment of benefits, even if it is convenient. That means recovery must be pursued separately based on overpayment of compensation. That pursuit is more trouble. Even though it is likely to prevail, the matter will be complicated by the employer's fault and the time and effort in the end is not likely to be worth it.

[J Simmons]

I'm betting unless the 'other orifices' are nostrils, sniffles would like to keep them out of this thread.

Maybe this thread can be considered closed unless sniffles wants to re-start it with a follow-up question.

[Bill Presson]

I'm a bit confused about a couple of things, so please bear with me.

1. Participant elects to have $38 per pay period withheld for 2008.

2. Participant quits 5/20/08 so he has probably completed 11 of the 26 pay periods and had $418 withheld.

3. I think we are all in agreement that if he turns in $988 of claims on March 31, 2008, the company/plan would have to pay the full amount.

4. The OP says that he comes in and submits the claim on March 31 and I am assuming it is 2009.

Questions:

1. With this scenario now laid out (assuming I'm accurate), does everyone still agree that he is eligible to receive the full $988?

2. What is the "run out" period? I'm guessing 3 months/90 days, but just want to make sure he didn't miss a deadline.

That run out likely began 1/1/2009 even though his employment ended 5/20/08, at least most of the documents I've seen don't specify the run out to begin on a mid-year termination at that time. March 31 was the 90th day, if that is what the plan specifies. The plan documents do need to be checked to make sure Bill's concerns are vetted.

I agree that the run out likely started 1/1/09, even though I didn't say it. So let's assume it was timely submitted.

I still don't think anyone has actually addressed the question. QDRO and Burns continue to act like children, so I'm just going to ignore them.

Please assume the deductions happened like they were supposed to and the participant actually had $418 withheld before he quit. If he submits the claim AFTER he terminates, is the plan still obligated to pay him the full $988?

[J Simmons]

I'm a bit confused about a couple of things, so please bear with me.

1. Participant elects to have $38 per pay period withheld for 2008.

2. Participant quits 5/20/08 so he has probably completed 11 of the 26 pay periods and had $418 withheld.

3. I think we are all in agreement that if he turns in $988 of claims on March 31, 2008, the company/plan would have to pay the full amount.

4. The OP says that he comes in and submits the claim on March 31 and I am assuming it is 2009.

Questions:

1. With this scenario now laid out (assuming I'm accurate), does everyone still agree that he is eligible to receive the full $988?

2. What is the "run out" period? I'm guessing 3 months/90 days, but just want to make sure he didn't miss a deadline.

That run out likely began 1/1/2009 even though his employment ended 5/20/08, at least most of the documents I've seen don't specify the run out to begin on a mid-year termination at that time. March 31 was the 90th day, if that is what the plan specifies. The plan documents do need to be checked to make sure Bill's concerns are vetted.

I agree that the run out likely started 1/1/09, even though I didn't say it. So let's assume it was timely submitted.

I still don't think anyone has actually addressed the question. QDRO and Burns continue to act like children, so I'm just going to ignore them.

Please assume the deductions happened like they were supposed to and the participant actually had $418 withheld before he quit. If he submits the claim AFTER he terminates, is the plan still obligated to pay him the full $988?

It depends on what the plan specifies. The claim submitted AFTER he terminates might be for medical services provided before he terminated (or during some grace period specified by the plan). If so, and the claim is submitted before the applicable run out period expires, the plan is obligated to reimbursement him for such medical expenses up to the amount elected by the employee for that annual health flex account, less prior reimbursements by reason of that annual health flex account. This is so regardless of the fact that $988 exceeds the $418 actually held out of his paychecks.

[Bill Presson]

I did a search and it looks like my part of the question was discussed a few years ago on here:

jvanheydeApr 19 2006, 04:16 PM

I'm having a discussion with our new HR director and we have a difference of opinion on the amount to which a participant in a Section 125 Plan FSA is entitled to if and when the participant terminates employment. Don't worry about COBRA for these purposes.

Assume Participant ("P") elects $2,400 of coverage on day one (January 1) of the plan year and will have $200 of compensation withheld from his paycheck on the last day of each month. As of March 31, P has had $600 of compensation withheld, and incurred no claims. On April 17, P got very ill because he owed so much in taxes, and incurred the full $2,400 of medical claims. Assume the claims will not be submitted until May.

Now, here is where I'm having a dispute or difference of opinion. My HR director agrees that if P continues to work for the employer and submits the claims for the April 17 services in May, the employer must reimburse the full $2,400 even though at the time of the claims submission in May, only $800 has been withheld. However, the HR director says that if P terminates employment on April 20 and then submits the claim in May, the employer "must" only reimburse the sum total of the year to date withholding ($600 - 3 months @ $200). Her position is that you can treat a terminated participant different than an active participant with respect to a claim that was clearly incurred while P was an active participant, if the claim is submitted after the termination of employment. Her position draws a distinction as to when the claim is presented (i.e., while employed or after termination), even though the claim was incurred while P was an active participant in the plan.

This evidently is the position of a national section 125 administrator. To me, it guts out the concept of a risk shift if the employer's potential liability is mitigated in this manner when the employee terminates. To me, it seems that all that matters is when the claim was incurred, and it does not matter if P was an active participant or terminated participant when the claim is submitted.

QDROphileApr 19 2006, 05:18 PM

If you are reporting correctly and I am reading you correctly, your HR director is wrong. You are correct that it would make mincemeat of the uniform coverage rule. I would say something unkind about the national administrator, but I have doubts that it agrees with your HR director.

oriecatApr 19 2006, 05:30 PM

I agree with you and QDROphile.

GBurnsApr 19 2006, 11:34 PM

I also agree. As long as the eligible expense in incurred while covered it cannot be treated differently and must be reimbursed to the full $2400 regardless of how much was contributed by the employee.

jgarberJul 6 2007, 03:14 PM

I hate to resurrect this issue, but in this case where the employee terminated, would you withhold the remaining election ($1,800) from the employee's final paycheck?

GBurnsJul 6 2007, 04:25 PM

No.

What would give the employer the right to withhold an amount in excess of the "per pay period" amount stated on the Salary Reduction Agreement?

LRDGJul 6 2007, 05:01 PM

The PD can be written in such a way as to allow the ER to minimize the risk of loss by withholding the remaining balance due for COBRA from the final paycheck. Assuming no conflict with state/local laws with respect to payroll withholdings.

It is impossible for the ER to eliminate 100% the risk of loss in the Medical FSA. It is the intent of the regs for the ER/plan to bare some risk of loss. If the risk is eliminated, the plan does not comply.

The size of the organization administering the plan bares no relationship to compliance. Some of the big players administer 125's in a way that eliminates the risk referred to in the regs and are never the less out of compliance. Not everyone plays by the rules. Some believe they're above the rules.

GBurnsJul 8 2007, 04:12 PM

How can the employer withhold for COBRA if the employee has not elected COBRA?

LRDGJul 9 2007, 01:55 AM

When the cobra election is made the 3 payment options for Medical FSA are

1. withhold from the final paycheck

2. allow cobra participant to issue a personal check or a combination of 1 & 2 the two

3. pay monthly FSA cobra payments

Without the option to withhold from the final paycheck, the tax savings benefit is lost, which is the sole benefit participation in the FSA provides. It provides incentive to continue participation on a post employment basis while maintaining tax savings. The option reduces the incentive to spend the annual elected amount before termination, helps avoid forfeiture for those with expenses after termination, while maintaining the tax savings benefit.

How can the employer withhold for COBRA if the employee has not elected COBRA?

Cobra election by the participant/EE is voluntary. Participant/EE can waive coverage under COBRA.

Cobra compliance by the plan/ER is mandatory. It must be offered to terminating participants/EEs.

GBurnsJul 10 2007, 03:47 PM

I know very well the procedures involved.

The OP clearly stated " Don't worry about COBRA for these purposes.".

In any case, outlining the options is irrelevant to this thread. The issue is not withholding for post termination participation in the FSA. The issues are :

1. The applicable cut off date for filing claims.

2. Recovering any amount over reimbursed by deducting from the final paycheck.

[jpod]

QDRO, thanks for the kind words. I respect your opinion too. The money must be worthwhile to the poster, otherwise why would he have raised the issue? Assuming part 4 of Title I applies (I guess it probably does), where is the "exclusive purpose" violation? The employee elected (presumably in writing or at least electronically) to have his pay reduced by $38 per month in exchange for FSA coverage. Is it implicit in that contract that the employer can never recover that money if it forgets to deduct it from pay? I think not. In any event, weighing the risks, I think it's worth the risk for the employer to implement what every rational person on the planet would consider to be the only fair result, legal technicalities aside.

[Guest sniffles]

I'm a bit confused about a couple of things, so please bear with me.

1. Participant elects to have $38 per pay period withheld for 2008.

2. Participant quits 5/20/08 so he has probably completed 11 of the 26 pay periods and had $418 withheld.

3. I think we are all in agreement that if he turns in $988 of claims on March 31, 2008, the company/plan would have to pay the full amount.

4. The OP says that he comes in and submits the claim on March 31 and I am assuming it is 2009.

Questions:

1. With this scenario now laid out (assuming I'm accurate), does everyone still agree that he is eligible to receive the full $988?

2. What is the "run out" period? I'm guessing 3 months/90 days, but just want to make sure he didn't miss a deadline.

That run out likely began 1/1/2009 even though his employment ended 5/20/08, at least most of the documents I've seen don't specify the run out to begin on a mid-year termination at that time. March 31 was the 90th day, if that is what the plan specifies. The plan documents do need to be checked to make sure Bill's concerns are vetted.

I agree that the run out likely started 1/1/09, even though I didn't say it. So let's assume it was timely submitted.

I still don't think anyone has actually addressed the question. QDRO and Burns continue to act like children, so I'm just going to ignore them.

Please assume the deductions happened like they were supposed to and the participant actually had $418 withheld before he quit. If he submits the claim AFTER he terminates, is the plan still obligated to pay him the full $988?

Okay - Yes the Election was $38 per payperiod which would be $988 for the year.

Yes, they have until 90 days after the end of the plan year to submit claims.

Yes, the claim was submitted in time.

Yes, he is eligible to receive the whole election as long as the incurred dates for his claims are between Jan. 1 and May 20th his last day worked and they were.

KY Dept. of Ins., DOL, and IRS all thought we had to pay him. We did and took the loss. Needless to say I have had our payroll department confirm that ALL deductions for Health Insurance, Flex Plan, and Dental Plan are being correctly withheld from the rest of our employees.

Thank you all for your comments, I really appreciate them!